The Smith Maneuver: A Financial Strategy for Wealth Building

The Smith Maneuver

The Smith Maneuver is a financial strategy that has gained popularity among Canadians as a way to build wealth and save on taxes. It involves borrowing against the equity in your home to invest in income-producing assets, such as stocks, bonds, or mutual funds. The strategy is named after Fraser Smith, the financial planner who first popularized it in the 1980s.

How Does the Smith Maneuver Work?

The Smith Maneuver works by using a home equity line of credit (HELOC) to borrow against the equity in your home. The funds borrowed can then be invested in income-producing assets, such as rental properties, stocks or mutual funds. The interest on the HELOC is tax-deductible, which means that the strategy can help reduce the amount of income tax you pay.

Here's an example of how the Smith Maneuver works:

Let's say you have a home worth $500,000, and you have a mortgage of $200,000. This means you have $300,000 in equity in your home. You can take out a HELOC for up to 65% of your home's appraised value ($325,000) minus your initial mortgage amount of $200,000. This would leave with you $125,000 to invest. You can also go up to 80% of your home’s appraised value ($400,000) with a combination of a fixed mortgage component and HELOC. This would leave with you $200,000 to invest. You can then use the HELOC/funds to invest in income-producing assets, such as rental properties, stocks or mutual funds.

Assuming an interest rate of 4%, the interest on the HELOC would be $5,000 per year. However, because the interest is tax-deductible, you can claim it as a tax deduction, reducing the amount of income tax you pay. If you are in a 40% tax bracket, the tax savings would be $2,000 per year.

Over time, as your investments grow, you can use the income generated by your investments to pay down your mortgage or your HELOC. This can help you build equity in your home while also building wealth through your investments.

What Are the Risks of the Smith Maneuver?

While the Smith Maneuver can be an effective way to build wealth and save on taxes, there are some risks involved. One of the biggest risks is the potential for investment losses. If your investments perform poorly, you could end up losing money, which could put you in a worse financial position than when you started.

Another risk is the potential for rising interest rates. If interest rates rise, the cost of borrowing on your HELOC could increase, which could make it more difficult to pay off your debt.

Finally, it's important to remember that the Smith Maneuver is not for everyone. It's a complex financial strategy that requires discipline and a long-term investment perspective. Before considering the Smith Maneuver, it's important to speak with a financial advisor to determine if it's the right strategy for you.

In conclusion, the Smith Maneuver can be an effective way to build wealth and save on taxes for those who are willing to take on the risks and responsibilities involved. If you're considering the Smith Maneuver, it's important to do your research and speak with BOSI Financial to determine if it's the right strategy for you.

Conclusion

Mortgage brokerage BOSI Financial is established in Calgary and focuses on investment and mortgage strategies, such as the Smith Maneuver. With knowledge on a variety of mortgages and circumstances, our team is highly skilled and experienced.

BOSI Financial can help you get a better rate on your mortgage, make home buying easier, and provide more options than any bank! Contact us today at +1 (800) 660-3576 or email hi@bosifinancial.com and let us know how we can help.

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